New funding and investment strategy regulations from the Department for Work and Pensions (DWP) could accelerate the "demise of defined benefit (DB)" schemes with an increased demand for pension liability buyouts, Mercer has said.

The DWP recently launched a consultation on the draft regulations for new DB funding rules, which was highlighted by the pensions industry as a "major" milestone for the DB funding code.

However, Mercer noted that the new regulations could require almost all UK DB pension schemes to divest entirely of return-seeking assets, the majority by 2040, which it suggested could prompt capacity concerns in future.

According to Mercer chief actuary, Charles Cowling, the regulations will likely force an accelerated end-game of UK DB pension schemes over the next 10-15 years, with a potentially “significant and dramatic” impact.

In particular, Cowling said that the draft proposals would force the sale of £500bn of return-seeking assets, which could result in around £200bn of liabilities being added to the balance sheets of employers with DB schemes over the next 10-15 years.

“The regulations would significantly accelerate the buyout of DB pension scheme liabilities, such that we might expect to see the demand for the settlement of up to £200bn of pension scheme liabilities each year for the next 15 years,” he explained.

“What isn’t clear yet, is whether this accelerated demand could be met by current market participants.”

In addition to this, although Cowling welcomed the move to a safer pension environment, he warned that the proposals could come at a high cost, and currently focus on DB pensions, rather than defined contribution (DC) schemes, that “millions of people currently working will rely upon in future".

He continued: “While we welcome efforts to encourage a safe and secure environment for member benefits, this should not come at cost of diverting scarce employer resources from the DC schemes that will deliver people’s pensions in the future.

“If adopted, these draft government regulations will significantly change the pensions landscape and make the operation of DB schemes more challenging, particularly smaller schemes.

“Trustees work in the interest of securing members’ benefits and must be given the flexibility to take steps necessary to deliver on this responsibility in a proportionate and appropriate way.”

Calls for further flexibility in the code have been emerging, with LCP also raising concerns that the new DB funding regulations could risk forcing all schemes into a ‘one-size-fits-all straitjacket’, leading to potential employer insolvencies in some cases.

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